First, real GDP grew 4.0% in the fourth quarter versus a year earlier, the slowest rate of growth since the second quarter of 2020. This was down from the 4.9% growth recorded in the third quarter. Moreover, other than during the pandemic, it is the slowest rate of growth since the early 1990s. Notably, real GDP for all of 2021 was up 8.1% from 2020. This high rate of growth reflected the impact of a near collapse of GDP in the first quarter of 2020. The report of slow growth in the fourth quarter was met with a central bank decision to cut two key interest rates for the first time since early 2020. The central bank move was cautious, however, cutting the rates only by 10 basis points. Still, when combined with other recent moves by the People’s Bank of China (PBOC), this suggests that the authorities are likely concerned about the economy’s evident weakness.
Meanwhile, the government also reported that retail sales grew a paltry 1.7% in December versus a year earlier. This was the slowest rate of growth since August 2020. Other than during the pandemic, this is the slowest growth of retail sales on record. Some categories of spending saw an absolute decline in year-over-year spending. This included clothing (down 2.3%), jewelry (down 0.2%), home appliances (down 6.0%), furniture (down 3.1%), and automobiles (down 7.4%). Sales were up sharply for oil products (up 15.5%), a reflection of higher oil prices. The weakness of retail spending was likely related to the surge in COVID-19 cases and the resulting lockdowns in numerous locations. The continuation of the zero-tolerance policy regarding the virus will likely limit retail spending growth going forward. There has been speculation, however, that the zero-tolerance policy might be eased once the Winter Olympics are over.
The weakest part of the Chinese economy was the property sector. Investment in real estate fell 13.9% in December versus a year earlier, which was far worse than the 4.3% decline in November. For all of 2021, the floor area of new construction starts fell 11.4% from the previous year. On the other hand, the volume of property sales increased modestly in 2021, evidence that demand continues to grow. The weakness in the property sector reflects the government’s decision to limit the ability of property developers to take on new debt.
Going forward, the head of China’s statistics bureau predicts that property investment will grow steadily in 2022. However, there is reason to expect that the sector will continue to contract in 2022, especially given the government’s efforts to restrict property sector debt. Moreover, if the sector continues to decline, it will have a negative impact on economic growth. While worrisome in the short-term, the decline in the property sector could be seen as a positive development from a longer-term perspective. That is because property had grown in recent years to an unnatural level, fueled by debt and generating extreme excess supply of residential property. For China to have a normal economy in the future, the property sector will have to be somewhat smaller.
The one positive element in China’s economy is industrial production. It grew 4.3% in December versus a year earlier, up from 3.8% in November. This was the strongest growth in industrial production since August. For the full year, industrial production was up 9.6%. The acceleration of industrial production, which also took place in neighboring Japan and South Korea, could be indicative of improvements in supply chain efficiency, the removal of bottlenecks, and fewer shortages of key inputs. By sector, there were some significant improvements. For example, automotive production increased 2.8% in December after having declined 4.7% in November. In addition, production of electrical machinery increased 5.8% while production of communications equipment increased 12.0%. The strength of industrial production coincided with strong exports.
The current slowdown of China’s economy, and especially its property sector, is likely to have global implications in the coming year. China imports a great deal of commodities, inputs, final products, and services from the rest of the world. A slower economy means a deceleration of imports, which will surely have a negative impact on China’s major trading partners. The decline in the property sector will mean fewer imports of construction-related materials than would otherwise be the case. This will likely include iron ore, coal, lumber, steel, and aluminum. There will also be a slowdown in China’s domestic production of these items. Lower imports of mineral commodities will put downward pressure on global commodity prices, thereby helping to reduce global inflationary pressures. Also, continued pandemic-related precautions will likely mean limited border crossings. This will hurt both China’s burgeoning tourist sector as well as global tourist locations that had become increasingly dependent on Chinese tourists.
Finally, it is worth noting that the last time prior to the pandemic that China grew so slowly was in the early 1990s when the country went through a political and social upheaval. That upheaval was not unrelated to the economic difficulties. China’s authorities want to shift growth away from property and toward consumer spending. This is a worthwhile endeavor, but it necessarily means a temporary shock. Managing this transition while avoiding an upheaval will be a significant challenge. It is no wonder, then, that China’s government is undertaking new fiscal and monetary stimulus.
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